Editor’s note: This market commentary is provided by  Dave Kurzawski risk-management consultant with FC Stone/Downes-O’Neill, Chicago, Ill.

Class III futures started firm yesterday on follow-through buying from Tuesday’s rally.  The expectation of higher CME spot prices also came to fruition, but so too did thoughts of product becoming available here in Chicago.  12 loads of barrel cheese traded from $1.4600 down to $1.4475 and with that headwind to higher prices, Class III futures retreated into negative territory putting in what appears to be at least a short-term top on the charts.  The trade is now willing to stem the tide of CME spot cheese and Class III Futures prices.  If that is truly the case, we expect that the short-covering rally of this week will fade into a pull-back on nearby futures contracts.  Look for a steady to 0.15/cwt higher opening this morning.

Block cheese eclipsed the $1.50 mark on bids only yesterday.  While buyers remain eager to acquire product, we should expect this north of $1.50 price to bring out sellers of block cheese.  We also ought to expect that prices north of $1.50 at this time will slow cheese export some.  We’re not saying that the potential for higher cheese prices this year is gone for good, but rather that there is fresh cheese available to come to market as the expected shift of milk to butter/powder has not materialized in earnest.

CME spot butter held steady again yesterday as the dance between eager buyers and nervous sellers continues at a lofty $2.10.   While butter remains poised above $2.00/lb., we are neutral butter now.  CME Weekly Stocks – released Tuesday afternoon – didn’t shed any light on a change in their situation.  While CME approved warehouse inventories rose 7.3 percent (943,000 lbs.) from last week, those inventories are still 70 percent below year-ago levels.  If the export bid does not come up to follow our Butter price - which has not happened thus far - we expect a return under $2.00 in the next few weeks. 

The dry products (NFDM and dry whey) still have a very bullish tone as inventories are light against strong demand.  Both Grade A and Extra Grade NFDM ticked higher yesterday again.  There is some expectation for the highs of 2010 – around the $1.40 level – to offer some resistance.  Look for a mixed trade on Butter, NFDM and dry whey to start the day.

Word from ‘Down Under’ suggests that recent rains are now impacting the milk producing region of Victoria.  It is too early to tell what kind of milk production losses can be expected, just that they are expected here in the near-term.

There has been some talk of higher premiums being offered to dairy producers in Wisconsin and Minnesota lately.  While competition for milk in the Midwest has been heating up over the past few months, it looks like it has more to do with positioning for processing capacity as opposed to a current shortage of raw milk.  Milk lines in the Midwest and Ohio River Valley remain flush right now.

For the grain bulls, the USDA reports were helpful yesterday.  The weatherman was not.  Weather in Argentina is looking much wetter now.  Buenos Aries should get up to 2 to 3 inches of rain with lesser amounts in other areas.  But that hasn’t stopped the price of corn from moving higher.  And the export sales numbers, which were slightly stronger than expected for corn, soy and wheat, should support this morning.  We expect a firm opening this morning.  But expect the funds will sell some of their old crop positions by the end of the week.


1/12  Class III Futures:   Volume:  2,376  Open Interest (OI) Change:  +539  Total OI:  32,376

1/12 Class III Options:  Est. Put Volume:  1023  Total OI:  23,761  Est. Call Volume:  530  Total OI:  22,526

1/12  Spot Markets:   Block Cheese $1.5025 (UP 5 3/2, 0 Trades); Barrel Cheese $1.4475 (UP 2 1/4, 12 Trades)

Butter $2.1000 (UNCH, 0 Trades); NFDM: A $1.3725 (UP 1 1/4, 0 Trades), X $1.3600 (UP 1, 0 Trades)

1/12  Other Dairy Futures Volume:   Butter:  46 Dry Whey:  55   NFDM:  11  Class IV:  27   Cheese: 116  International SMP:  0


1/12 Individual Class III Futures Prices, Change, Volume & Open Interest

Jan 11    $13.52                UP 6                       Vol:   237             OI Change:     DOWN 78

Feb 11     $14.87                 DOWN 5               Vol:   784             OI Change:     UP 107

Mar 11    $14.93                DOWN 9               Vol:   539              OI Change:     UP 167

Apr 11     $15.30                DOWN 4               Vol:   218              OI Change:     UP 85

Jan-June 2011 Avg:     $14.95                   DOWN 0.04/cwt

July-Dec 2011 Avg:      $15.86                   UP $0.02/cwt

Jan-Dec 2011 Avg:       $15.40                    UNCH


These data and comments are provided for information purposes only and are not intended to be used for specific trading strategies. Although all information is believed to be reliable, we cannot guarantee its accuracy and completeness. Commodity trading involves risks, and you should fully understand those risks before trading.

Source:  FCStone/Downes-O'Neill